Graphic Packaging Holding Company

Hello and welcome to today's graphic packaging first quarter 2022 earnings call. My name is Bailey and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Melanie Skigis, Vice President of Investor Relations. Melanie, please go ahead.

Good morning and welcome to Graphic Packaging Cooling Company's conference call to discuss our first quarter 2022 results. Speaking on the call will be Mike Doss, the company's president and CEO, and Steve Scherger, executive vice president and CFO. To help you follow along with today's call, we will be referencing our first quarter presentation, which can be accessed through the webcast via self-directed slides and also in the investor section of our website at www.graphicpkg.com. I would like to remind everyone that statements of our expectations, plans, Estimates and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the date on which they are made, and the company undertakes no obligation to update such statements except as required by law. Mike, I'll turn it over to you.

Thank you, Melanie. Good morning to everyone joining us on the call and this webcast this morning. We're off to a great start in 2022, and I'm pleased to share with you a very strong first quarter. We're operating well and doing what we said we do, including delivering another quarter of net organic sales growth, pivoting to a positive price-to-commodity input cost relationship, driving margins higher, and executing a very significant step-up in adjusted EBITDA. We'll spend some time on today's call discussing these positive results and operating model we've put in place to drive continued profitable growth and returns to our stakeholders. On slide three, let's briefly walk through the key highlights from the quarter. Adjusted EBITDA was $350 million, an increase of 46% year-over-year. Adjusted earnings per share, excluding amortization of purchased intangibles, improved 78% to 48 cents. Net sales for the quarter were a record $2.2 billion, up 36% year-over-year, driven by a 3% net organic sales growth, successful execution of pricing initiatives, and and contributions from acquisitions. Notably, the first quarter marks the eighth out of nine quarters that we have delivered net organic sales growth, building on our track record of consistent long-term organic sales growth performance. During the quarter, we advanced two transformative company investments we initiated to extend our global leadership in fiber-based packaging. Both have recently been completed, bringing months, in the case of Kalamazoo, years of hard work to fruition. After closing our packaging acquisition in the fourth quarter of 2021, we continue to actively integrate our expanded European platform in the first quarter. Our dedicated teams have been working collaboratively, meeting early integration targets, and are on track to deliver $40 million of synergies over the next two and a half years. Separately, our new K2 machine and CRB platform optimization investment in Kalamazoo, first announced in 2019, came to life during the quarter. The K2 machine is operating and continues to ramp up production. The startup is meeting expectations. The investment in our CRB platform will yield substantial quality and efficiency enhancements, provide environmental benefits, including lower greenhouse gas emissions and water usage, and deliver $130 million of incremental EBITDA over the next three years. $50 million in incremental EBITDA is expected this year. Finally, before moving on from this slide, a comment on our financial strength. While we are clearly operating in unprecedented times, we continue to see robust demand for innovative fiber-based consumer packaging solutions. Given strong underlying demand, company-specific initiatives driving expansion and profitable growth, and overall excellent performance globally, we are reiterating our 2022 financial guidance provided at our investor day in February. We have a strong business, we are quickly deleveraging, and we have greater than a billion dollars in global liquidity. While we are performing very well as a company, we aren't operating in a vacuum, and I would be remiss not to acknowledge the geopolitical events that are impacting our global communities. As humanitarians and global citizens, we are living in very unsettling times. Our hearts go out to the people of Ukraine and all those standing in harm's way. On slide four, let me provide an update on the business we acquired in Russia in the fourth quarter of 2021 as part of the AR packaging acquisition. Our business in Russia consists of two folding carton facilities, one in St. Petersburg and the other in Timoshek. The converting facilities primarily serve multinational food service and tobacco customers for local Russian consumption. The business is small, accounting for roughly 1% of total sales and less than 1% of annualized EBITDA. We are adhering to all U.S. and European Union sanctions and are currently operating to meet existing customer contractual commitments where possible. We are not making any new investments in the region, nor are we entering into agreements with new customers. We will continue to explore all options for the business as existing customer agreements expire. Turning back to the quarter and expected full year 2022 financial results on slide five, I will discuss pricing actions implemented and recognized over the 2021 and 2022 timeframe. In Q1, as we guided, we pivoted to a $46 million positive price-cost relationship. $222 million offset $176 million of commodity input cost inflation. Importantly, in Q2, pricing momentum continues and we expect the positive price-cost relationship to expand into the range of $80 to $100 million as we make further headway recovering the price-cost dislocation experienced in 2021.